Modelling Credit Spread, Implied Volatility, and Optimal Capital Structure with Endogenous Default and Jump Risk

Seminar series

Date

Fri, 03 Jun 2005
14:15

Location

DH 3rd floor SR

Speaker

Steven Shreve

Organisation

Carnegie Mellon University

We propose a model for credit risk with endogenous default and jump risk. The model has four attractive features.

It can generate flexible credit spread curves.
It leads to flexible implied volatility curves, thus providing a link between credit spread and implied volatility.
It implies that high tech firms tend to have very little debts.
It yields analytical solutions for debt and equity values.

This is a joint work with Nan Chen (a Ph.D. student at Columbia University).